Commercial Real Estate Investing From A-Z

How to approach due diligence on a new operator as a limited partner? How should investors decide if they should invest in a fund or not? How should you fundraise for deals that have not been determined what they are yet? When to say no to a potential investor? Dr. Joseph Ryan Smolarz, founder of STOR, shares his insights.

Read the entire interview here: http://tinyurl.com/yph2892p

What are some of the main topics that you want to pass to passive investors and how should they do due diligence?

The basis of the whole interaction is trust, you're trying to build rapport with your investors from a sponsor's point of view. From an investor's point of view, you want to make sure that you're a good fit. You have ways of thinking about things and your risk tolerance needs to fit into the asset class and the investment strategy that you're trying to do because if you're in a very aggressive fund, and you have a low-risk tolerance, regardless of what happens, you're not going to be happy. Those are the questions that I would start with.

When you're starting the due diligence as a sponsor, the number one goal is to make sure you're not in a Ponzi scheme or some sort of fraudulent group. There's a lot of good questions to ask to sort of drill down on that and if you're not comfortable at the beginning, you're probably not going to be comfortable at the middle or the end, as well.

During an up market, how would you recommend doctors doing their best to find out if a sponsor is not legitimate?

Having made several pretty bad mistakes as a limited partner, this is a topic that's near and dear to my heart. When I approach a deal as a limited partner, what I'm trying to do is understand that sponsor in such a way that we can build a 30, 40-year relationship. It's not about the first deal in its entirety, because I'm willing to put in the time, effort, and cost to get to a comfortable place knowing that when these guys or girls have a deal, and they send it to me, that I'm never going to have to go through this first step of due diligence again. I'm comfortable that they're not trying to push one past me, or whatever the case may be. And that's a gigantic step. I would personally say, and I know this is going to be shocking to your audience, but a lot of times, what I'll do is, I will hire a PI to go through and make sure that some of their previous deals have not been fraudulent.

If I had a fund, and I knew that the economy was about to take a turn, for example, in 2024, we all know that it'll be even better for finding deals. However, there is a lot of fear that normal human beings think that that specific time will never end and it'll be doom and gloom for a very long time so they end up not putting the money. From a fund perspective, I would personally prefer to have that cash available right now in case people get cold feet, how would one go about that, in your experience?

There are lots of sponsors out there that will do that, they'll get the capital, and hold on to it. It does add liability to to the fund. If you're going to do that, you would probably want to know how much E&O insurance they have, errors and omissions, and all the things to safeguard. Is there the ability for one person to be able to extract all of the cash and run, or is there a safety mechanism where it takes two people to sign off on it? There are lots of checks and balances, and systems out there that can be put in place for a reasonable cost if the sponsor hasn't thought about that, and what happens in those scenarios, and they very well should. But it's just personal preference.

Dr. Joseph Ryan Smolarz

www.storpartners.com

The Medicine & Money Show

Which real estate markets are growing more rapidly in the US, and why? What will happen to construction costs given the on and off tariffs? Pike Oliver, author of Transforming the Irvine Ranch shares his insights.

Read the entire interview here: https://tinyurl.com/5fxk6ydm

Regarding markets from your newsletter, the few growing cities are Raleigh, North Carolina, Gainesville, Georgia, and smaller, large metro areas.

There are about 56 or so metropolitan areas and more than a million people in the USA, and the ones that are growing more rapidly now are the smaller ones, those that have a couple of million population. Raleigh and Gainesville would be an example of that. And even areas that are in the 500,000 to a million range, I think some of that has to do with housing affordability, and I think that also people just maybe wanting to be in a less congested environment, that has shown up to be a factor now. The larger regions, Southern California, the Bay Area on the West Coast, Seattle, New York, all the Boston to Washington corridor on the east coast, and Atlanta, they're growing at slower rates, and a large portion of those regions do present a housing affordability challenge. If you look at the percentage of household budgets that go to housing and transportation, it's a significant percentage. Can you manage your transportation cost? Maybe that'll be somewhat dependent on distance to work and commuting, but the big cost is having the vehicle, insuring the vehicle, and financing that. The one that you can manage is to go to a market that has much less expensive housing. If you're in a market that can offer you a $400,000 house, versus a market where it takes a million, that makes a big difference.

I wonder how the inflation will continue to make an impact on the bedroom communities?

That's a big question. The whole issue with potential tariffs. Now, I believe we're on again with some pretty significant tariffs on aluminum and steel, affecting Canada, Mexico and and certainly China. I think that's as I understand it, across the board, that'll have some impact. I think just the uncertainty will have some impact.

And then construction costs, my take on that is I don't see much abatement in that area. We're going to have, I think, continuing in Southern California, because of the fire effect, they'll be as significant and particularly on the labor side. And this also then relates to the issue of immigration enforcement in the construction industry, particularly the residential construction industry, there's a substantial percentage of undocumented people working in those areas. Again, an open question as to how much of that is going to translate into higher labor costs.

Looking ahead in 2025, people were saying, hold until 2025 and you'll be fine. And now, they move to 2026, I hear lenders are extending their loans to their existing clients based past 2025, where do you think we're going to be this year? Do you think it's a great or not so great time to invest in real estate?

It's always a good time if the characteristics of the individual property are great and if you can swing the equity or the debt to close the deal. As to whether there are a lot of real bargains, that doesn't seem to be the case, the only area where that seems to be a possibility is with office assets, but then you're taking on the challenge of occupying that space, or undertaking a residential conversion.

Pike Oliver

news.ares.org

[email protected]

How to canvass tenants for retail properties? What are some techniques to get a new tenant? Who to target? Beth Azor, the "Canvassing Queen", CRE leasing coach, developer, investor, author/speaker, and CEO of Azor Advisory Services shares her knowledge.

Read this entire interview here: http://tinyurl.com/2jdstyra

How to canvass tenants for retail properties?

Canvassing is when we knock on doors to find tenants to lease spaces in our vacancies. I was taught very early in my career not to sit around and wait for the phone to ring, go out, and knock on doors. If you think about what would qualify as a great tenant, it would have other locations, someone that's paying another landlord rent. How easy is it? This is why I love retail, It's just great to be able to go within 1 to 2 hours from your property and knock on doors of retailers to see if they're interested in expanding or opening in your shopping center.

Canvassing tips and examples:

I was sitting at a red light, and there was a van across the way from me. On the bottom of the van, there was a plumbing supplies company, and they had five locations listed. What I always tell my students or my leasing agents who work for me is this: if someone has one location, it's a 50/50 shot if they want a second; if they have three, four, or five, they want more – they're in the expansion business. That is why I took a picture of that van, saying, "Hey, everyone, open your eyes, this is a business; they have five locations, here are their locations." Now, I know that one of my shopping centers was a hole in their doughnut of locations. I called the place, and they said they weren't interested in my area, but they gave me two other areas, and I have no friends that own properties there, so I sent my friends the information.

There are prospects everywhere. There are prospects on bus benches, where you're driving down and it reads "Hey, have a smoothie!" and they list multiple locations under the bus bench. I love getting the little magazines that they hand out at doctors' offices or pediatrician offices, where it's the little community magazine. I grab those, and then on the weekend, I go through them, and I have found tons of prospects, because what does it tell you if they're advertising in a magazine? They've got money because we know the first thing that goes, if attendance is not doing well, a business isn't doing well, is marketing. They have another location, and they have money to spend on marketing, so I'll call them.

I just did a deal with a men's clothing store that I found an ad in a magazine and called them up. I said, "Hey, I've got this property; we'd love to have men's clothing," and they were very interested. Within 90 days, they opened in one of my properties.

I have an assignment that I'm working on in Cleveland, where I took over a 15% occupied mall and we have signed 49 leases in two years. I've met over 1800 businesses in Cleveland personally in two years. That's how you sign 49 leases. I realized that because the property was in downtown Cleveland, with lots of office buildings around and the food court had only two or three tenants, but because we got their sales, we knew that they were doing very well. I created a flyer that showed a picture of the nine available food court spaces. I said, "Food court spaces are available. I think it's a great rate, utilities included." Then I asked, "Which ones had hoods and which ones had refrigeration?" And I went and handed it out to 50 restaurants like fast-casual restaurants. Within 90 days, we leased five of them. Flyers—where the guy can come into the store and the gatekeeper goes, "Oh, this lady dropped this off, but it's got nine food court spaces; this one has a hood, this one doesn't have a hood." This is better than a business card.

The last thing I want to say, which is the most important, is when you walk into a retail space, never ask for the owner. I know there has been decades of sales training that says, "Get to the decision maker," but I promise you, if you walk in and say, "Is the owner here?" you're going to shoot yourself in the foot. It's just a terrible thing to do because they'll immediately think, "Why doesn't she think I'm the owner?" and they might even lie and say, "No, the owner's not here."

Beth Azor

www.bethazor.com

www.twitter.com/bethazor1

www.instagram.com/bethazor

What is unit level profitability? What kind of tenant is best to pick for your industrial space? How do you add value to an industrial investment? Neil Wahlgren answers a lot of our questions regarding this popular asset class.

You can read the entire interview here: https://montecarlorei.com/how-to-invest-in-industrial-real-estate-part-2/

What is unit level profitability?
It refers to whether or not you have insight, as a landlord or as a real estate owner into the profitability of the particular location of the building that you're buying. If your tenant has several locations, you are interested on how profitable is this store in this piece of real estate that I'm buying.

When you say that you are getting properties at 8.5 cap rate, how do you add value to that property? Because you're dealing with the seller, and they're going to lease back the property. And it's going to be a 15, 20 year lease. So how do you guys bring value besides that 8.5 cap?
1. The first is cash flow, and with that cash flow with that net lease structure, you have an expense free set of cash coming in to the ownership pool. With those we typically structure our deals to target 8% going to investors minimum on year one, and that's going to increase year to year as rent bumps kick in. One of the nice things about these leases is typically they will have built in rent bumps. So without doing anything, you have typically one and a half to 2% increases in rent kicking in every year. And because there are no expenses, that rent is usually equal to the NOI of that property. Now imagine you have a static cap rate, I know for a fact my NOI is going to increase 2% a year. So that's the first way that I'm creating value such that if I hold it for five years, I've seen roughly 10% increases in NOI. And now at the same cap rate I can sell and see a significant increase in value.

2. The second piece is paying down principal on the debt. You are able to acquire between 70 and 75% leverage on debt on the real estate. Most of our real estate debt comes from local lenders, or credit unions, they know both the tenant company and the area very well. And that's even more important when you're buying tertiary real estate, where the local lenders really believe in the companies, oftentimes those companies have been in place for 40, 50, 60 years, and you're able to get more aggressive and better terms on the lending. We acquire fixed rate debt, fixed interest rate, usually in the low fours or high threes in today's environment. With that, every month, you're paying down principal on the debt.

3. And then the third is a little bit more subjective. We look to buy real estate in growing metros where we feel like there's a chance for a cap rate compression. For example, today Omaha is trading around 7, 8 cap for a lot of industrial properties. If we think that there's a good chance that this might compress down to a six or seven cap environment in five years, based on the growth that we're seeing in this area as a way to create value. And the other half of that third piece is what they call credit enhancement. Imagine if you buy a piece of real estate with a tenant that has $30 million a year in revenue, and in five years, that company is doing 100 million dollars a year in revenue. Now that's a much stronger tenant, which provides a lot more security on your lease. So now you're able to sell that same piece of real estate at a lower cap rate because you've reduced the amount of risk.

Subscribe to our newsletter here: www.montecarlorei.com

What are some of the biggest items that syndicators need to keep in mind? How to raise a fund yourself under your company name? Mauricio Rauld , real estate syndication attorney of Premier Law Group and host of real estate syndicator live, shares his knowledge.

Read this episode here: https://tinyurl.com/yvk4k4e3

What are some of the biggest items that syndicators need to keep in mind that are easily forgotten?

Understand that you are in the business of selling securities, because a lot of times, especially new real estate syndicators, they don't quite understand that. I'm just buying real estate, why do I have to worry about the Securities and Exchange Commission or the SEC? I'm just getting a couple of my friends and we're going to go buy a single family home, or buy this building, why do we have to worry about all this stuff? People think of SEC as the stock market, stocks, bonds, mutual funds, etc but it is much broadly than that. TIC agreements, joint ventures, profit sharing agreements and promissory notes are potentially securities, I always joke that high fives and handshakes are securities but the structure itself doesn't matter. People try and get creative such as I'm going to structure it this way or that way, or it's just a loan, it's just my dad, but the reality is the SEC doesn't care about any of that, all they care about is whether you are raising money, where the returns are generated by your efforts. If you're raising money, and you're doing all the work, or you and your co-sponsors are doing all the work, and you have passive investors who are writing you a check, it doesn't matter how you structure it, and how creative you get structuring it, it's going to be a security and that's something that newbies forget.

What would be a way to go around that, would it be to raise a fund yourself under your company name, and then invest in that deal if you don't want to participate fully on the operations side or other things?

In order for somebody to come into the syndication group as a legitimate co-sponsor and bringing in some capital, there are three things they need to fit into because there's an exemption. The general rule is you need a broker dealer license, but we can find an exemption to registration and that would be what we call the issuer exemption which requires three things and most of these deals don't follow. Number one is no transaction-based compensation. This happens a lot, you have to be willing to say, I'm going to give you 10% of the GP even if you don't bring a single dime. I know you promised that you thought you were going bring a half a million dollars from your investors and it turns out, you aren't able to bring any, you still have to get that 5% or 10% because you're giving that person that percentage, not for raising money, but for other things they should be doing like any other syndicator: due diligence, underwriting, asset management and all these little ton of things otherwise it's transaction-based compensation. Your primary role needs to be those substantial duties, it can't be raising capital and you have to show that you're doing more than that. If you're a real syndicator, you have two or three partners, you're part of the team, and you're all working hard to make this deal work, then you're going to fit into that exemption.

Do funds pay an interest until they allocate all of the funds, is that optional?

That's the beauty of syndications in general and certainly with funds, you can be as creative as you want to be. I would usually recommend not making it super complicated, because then you start losing investors. Some people decide to give a flat fee, almost like a coupon rate.

Mauricio Rauld

www.premierlawgroup.net

www.youtube.com/@MauricioRauldEsq